Opportunities to address

Treasury:3720848v3 Impact Summary Template | 3

Opportunities to address

Improving transparency within the NZ ETS will provide opportunities to:

i . Improve publ i c t rus t and understanding of the NZ ETS and par t i c ipat ing businesses

There are currently limitations on public trust and understanding of the NZ ETS and how it operates as a tool to reduce New Zealand’s emissions. This exists for a number of reasons, including the fact that New Zealand’s gross GHG emissions have continued to increase since the NZ ETS was introduced, the upstream structure of the scheme, and the past use of international emissions units. Some of these international units had issues of environmental integrity and caused a crash in the spot price of NZUs (the latter issue was addressed through a decision to limit international units if the NZ ETS is to reopen to these in future). The public also has little visibility over where emissions are originating and sources of emissions removals within the scheme.

i i . Improve the ef f i c ient operat ion of the NZ ETS

The transparency of the NZ ETS impacts on participants’ understanding and confidence when trading in the market. Transparency provides visibility over where trends and volumes are originating, the impact this has on supply and demand, how this may affect the trading price, and liquidity within the market. Therefore, increasing transparency can provide the opportunity to improve the efficient operation of the NZ ETS.

i i i . Bet ter a l ign pract i ce in the NZ ETS wi th other in ternat ional emissions t rad ing schemes

Releasing a greater level of participant level emissions trading data may provide the NZ ETS with the opportunity to better align and allow linkage with other reputable emissions trading schemes, . Many schemes have a greater level of transparency than the NZ ETS, and include publication of individual participants’ emissions data and participant non-compliance.

Confidence in the opportunities

During the Improvements to the NZ ETS consultation, improving transparency was a common theme in order to help people make informed decisions about the businesses they are dealing with, making businesses have greater accountability, providing greater emissions reduction incentives, and overall greater ability for the public to follow and support New Zealand’s emissions reduction targets.

Throughout other consultations, such as the 2016 New Zealand Emissions Trading Scheme Review, participant feedback regarding the level of currently available information impacting on the ability to make informed decisions was a consistent theme.

There is information to support the view that alignment with other ETS will be improved by increased transparency, including a report by the International Emissions Trading Association (IETA), regarding overlapping policies with the EU ETS, which stated the importance of transparency, and that it should be a minimum requirement for comparability with the EU ETS.2

2 https://www.ieta.org/resources/EU/IETA overlapping policies with the EU ETA.pdf International Emissions Trading Association, Overlapping policies with the EU ETS, (2015)

s9(2)(j)


We have also received direct feedback from the EU about the lack of information available about the NZ ETS market:

“We note that emissions data and compliance information about individual participants are not publicly available in the NZ ETS. In the EU ETS, such data is made available in a timely manner since the very start in 2005. This level of transparency is important for the efficient operation of the carbon market.”

Taken together, the three opportunities make a strong case for making legislative changes to enhance the integrity of the NZ ETS by making the scheme more transparent.

Why it should be addressed now

There is increasing public interest, both in New Zealand and internationally, regarding climate change related issues, what the Government and businesses are doing to address them, and how New Zealand is progressing towards its domestic and international climate change targets.

In New Zealand there is currently an active discussion regarding possible requirements for some businesses to release their emissions related data. The Productivity Commission recommended in their Low-emissions Economy report that the Government should implement mandatory (on a comply-or-explain basis), principles based, climate-related financial disclosures. The main purpose of the disclosure regime would be to ensure that the effects of climate change become routinely considered in business and investment decisions. This is referred to as Climate Related Financial Disclosure (CRFD).

It is timely to consider publication of emissions data in the NZ ETS while the Government is also considering its response to the Productivity Commission. The Government is likely to agree in principle to the Productivity Commission’s recommendation. The report did not address the classes of entity that the disclosure would apply to, and the Government is still considering this issue. It is likely to include the major entities that participate in New Zealand’s financial markets, i.e. listed issuers, registered banks, licensed insurers, and investment businesses that own or manage assets on behalf of the investing public. There is still discussion over whether it would include private companies, as they do not issue debt securities, there is no active market in their shares and they do not otherwise hold or manage money obtained from the public in a fiduciary capacity.

Internationally, it is becoming standard practice to publish emissions data. United States, Canada, and Australia are examples of countries where compulsory publication of business’ emissions data occurs.

There are also other increasing drivers building the case for why transparency within the NZ ETS should be addressed now:

• NZU prices are likely to rise in the future, meaning efficient and confident trading will become increasingly important

• changes in the structure of the market, including the introduction of auctioning and a unit supply cap on emissions

• discussion of linking with other international ETS markets in future as emissions targets become more ambitious

• A second tranche of changes to the NZ ETS are currently being progressed together that will form part of a combined amendment bill to the CCRA, to be introduced to the House in mid-2019.


2. Amend the CCRA to require publication of all NZ ETS participant level emissions and removals data. The pros of this option are that it releases the most relevant data relating to emissions/removals activity within the scheme. Publishing this information may help to improve transparency and subsequently help to increase market efficiency through improved price discovery. Greater visibility over the sources of emissions and removals also provides the information that the public is becoming increasingly interested in, and will help to build trust and understanding of the scheme.

The cons of this option are that it releases information that some participant businesses may consider to be commercially sensitive, such as being able to allow for the calculation of annual production volumes, energy operating costs, and what products they import for manufacture. However, this type of data can often be determined for public companies from annual reports, which are published by several large NZ ETS participants. Some businesses have also said that release of this data could have unintended consequences for how the public interacts with them, if they appear to be responsible for a significant amount of emissions due to the NZ ETS upstream point of obligation.

3. Amend the CCRA to require publication of NZ ETS account holder level NZ ETS unit holdings. The pros of this option are that it releases an area of NZ ETS market information that is not currently available, and so increases the level of transparency within the NZ ETS.

The cons are that it releases information that is less relevant to the public, and does not provide insight into emissions trends, supply and demand and market price, to increase market efficiency. It is also particularly commercially sensitive when compared to only emissions, because it can indicate future business plans and trading strategies, and release how businesses may be stockpiling up on units. It can also be used to calculate the total value and profit of NZU holdings that businesses are in possession of, effectively like disclosing the total value stored in a bank account. There may also be an increased security risk for participants who have recently earned NZUs, as they will be easier to identify. These people may become targets of phishing attacks or other attempts to gain their units below market value, particularly where these are less sophisticated market participants.

4. Apply account holder level publication requirements only to publicly listed companies. The pros of this option are that it reduces concerns about publishing commercially sensitive information as many publicly listed companies already chose to publish this type of information in annual reports.

The cons are that it does not provide consistent information that would treat all participants the same, so does not realise the full opportunities.

Only 45 percent of all NZ ETS businesses are registered in New Zealand, and of these, many are not listed as either publicly listed or private. It would not fully meet the requirements needed to have full visibility over the market to improve market efficiency, or meet the full level of transparency of other ETS markets. From the perspective of the NZ ETS and the NZU market, it does not make any difference whether a participating company is publicly listed or not. A large company would likely have the same impact on the NZ ETS from a supply and demand perspective, regardless of whether it was privately held, or publicly listed.


Option 2 will amend the CCRA to require the annual publication of participant level emissions and removals data. This option is relevant in multiple ways to both the wider public and participants of the NZ ETS, and can help align the NZ ETS better with international ETS.

Confidentiality concerns

Concerns have been raised from some participants regarding the commercially sensitive nature of releasing emissions data. We consider this to be a legitimate concern, however, we have found limited evidence where releasing similar information has had significant negative impacts on businesses.

Similar concerns were originally raised in the NZ ETS regarding the publication of industrial allocation data. In the CCRA, industrial allocation information does not have to be published if the EPA considers that publishing the information would be likely to prejudice unreasonable their commercial position. Some information was withheld during the first few years of the scheme under this provision, but has since been released, and currently industrial allocation is published for all recipients. There has been no evidence that this has been damaging to businesses, and no businesses have recently raised concerns about their confidentiality.

Compulsory release of emissions data by businesses also currently occurs in the EU, United States, Canada, Australia and Japan, and has no significant evidence of causing negative financial impacts on corporations in these strong economies. Research from the EU ETS, has showed that participation, which involves releasing emissions data, has led to an increase in regulated firms’ revenues and fixed assets3. Appendix 2 provides a table of emissions disclosure locations and schemes.

How Option 2 addresses the opportunities

By publishing specifically emissions and removals data, Option 2 provides the most relevant market data for participants to use when assessing market sources, trends, supply and demand, and potential trading prices. This insight can impact on strategic decisions around investment and business planning.

For example, because of the current restrictions on publishing data from individual firms, it is not possible to know with certainty which forestry companies are the major potential suppliers of NZUs into the market. If the major forestry companies were able to be identified through a new, broader transparency framework then market participants would know which companies matter the most to the NZ ETS. Market participants, analysts and commentators would then be better able to judge whose opinions and actions have the most influence on the market.

There is extensive economic evidence supporting the assumption that increased market transparency leads to an increase in market efficiency. This has been shown in many different kinds of economic markets, including emissions trading. A 2015 study by the People’s Bank of China and the U.N Environment Programme concluded that a healthy carbon market depends on good data to provide robust price signals.

Transparency provides all market participants with the same level of data on which to base decisions, and increased visibility over any kind of misconduct. This is particularly important for the NZ ETS which has a large number of small participants trading small

3 The Joint Impact of the EU ETS on Carbon Emissions and Economic Performance, OECD Economics

Department (2018)


Forestry returns currently only record the net carbon stock change, and will therefore only present the net emissions for the activities they have undertaken.[1]

To ensure the overall supply and demand dynamics can be assessed, data for all participants, including the individual participants that form a consolidated group, compulsory and voluntary, will be published. This will include agriculture, who already report emissions to the EPA, even though they do not face a surrender obligation.

The EPA will be given the responsibility for publishing the NZ ETS participant level emissions and removals data. The data will be obtained from emissions returns that are already submitted to the EPA and MPI by NZ ETS participants, and will be published by at least annually, as practicable. To provide a cohesive representation of the scheme, it is advantageous to publish all return information together, requiring the EPA to collect information from MPI that they do not currently hold for harvest emissions. MPI may be required to record more activity level data, rather than the ‘net emissions’ data. This needs to be able to be worked through before the Bill is finalised, including any financial implications.

In regard to implementation, officials will work with NZ ETS participants to ensure that participants are aware that this information will begin to be published. There is a risk that if emissions data is not properly contextualized, public misunderstanding of the scheme may occur. For example, emissions from forestry harvesting can be very large compared to year-on-year sequestration, and putting a participants activities in the context of wider forestry in the ETS will be important to maintain public support and understanding of the scheme.

The security risks from releasing more information will also need to be managed. Appropriate tools to inform participants about these risks and whether they are emerging in the market can be addressed in wider work around Market Governance in the NZ ETS (e.g. issuing warnings to participants if we are aware that participants are receiving cold calls offering low offers for their credits).

If significant concerns by businesses remain relating to the issues regarding commercial sensitivity of data, there is the potential option to create the ability for the EPA to withhold the information if participants are able to provide evidence to satisfy the EPA or MPI that the information would be likely to prejudice unreasonably their commercial position. This would need to be considered during the select committee stage, which is not optimal. However, it would provide an opportunity to address these concerns. The EPA and MPI have expressed significant concerns regarding the potential administrative costs of having to implement this.

Other implementation risks are relatively minimal, as there is a significant amount of time to prepare how and where the data will be verified and published, before the first individual participant emissions are published in 2021, relating to emissions from 2020.

[1] Forestry returns in 2021 and 2022 will often include removals relating to years prior to 2020 (due to the option

of not reporting every year, and a mandatory requirement to report only every five years or if other, specific, criteria dictate.)


the potential for international linkage

even if they don’t include removals, they may be aware that not publishing this, leaves a large section of the NZ ETS not transparent, which could cause issues.

Participant support X

A proportion of ETS participants are opposed to having data released on their emissions or removals that they believe could be commercially sensitive However other participants may support it for the benefits that increased transparency give them when trading in the market, such as market efficiency.

XX ETS participants are likely to be opposed to releasing private NZU data that discloses financially sensitive information regarding the total value of NZUs that they are in possession of and potential businesses with a high number of units to be targeted by attempts to gain units below market value. Seeing other participant unit holding may help some account holders with their trading plans.

X Private businesses may support this plan due to not having to release their data. Public businesses may be less concerned with having their emissions released, if they already have commercial information publicly available. However, they would likely still want to be able to make the decisions about releasing their emissions or not by themselves.

XX A proportion of ETS participants are opposed to having data released on their emissions that they believe could be commercially sensitive. However this option may be popular with removal participants, such as small forestry participants, who do not want their data released.

Market efficiency

Because emissions and removals are traded within the scheme, they are a relevant form of market data and release will increase transparency, such as supply and demand and therefore increase the ability to trade and market efficiency

Release of NZU holdings data increases transparency and may support market efficiency by seeing where supply is located. However, it does not address gaps in knowledge of emissions trends and where this is coming from.

O Only releasing data of certain businesses leaves large gaps in the market, not specifically based on any sector type. It will not significantly help with assessing supply and demand, or trends.

Releasing all emissions data will help to have full understanding of the demand side of the market which will have some effect on increasing market efficiency. However, having the supply of NZUs limited to aggregated data, leaves a large gap in the market and will not entirely fulfil market transparency requirements to improve market efficiency.

Overall assessment

X X

Documents

Opportunities to address